Cheap Hire Purchase
Spread the cost of buying your car
If you need a car and can't pay for it upfront, hire purchase is one of the options open to you. It's been used to buy cars almost since there's been cars, but that doesn't mean it's the right deal for you.
Here’s a guide to break down the basics, including how it works and how to work out if it's right for you. We also reveal where to go to find the cheapest deal.
This is the first incarnation of this guide. Please suggest any changes or ask questions in the hire purchase discussion.
In this guide
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What is hire purchase?
If you’re buying a new or used car and need to borrow, and know you want to own the car at the end of the deal, there are three main types of finance you can get.
You can get a standard personal loan, and there's tons of info in the Personal Car Loans guide to help you pick the right one. Another way is Personal Contract Purchase, but it's not cheap if you know you want to own the car. Or, dealers – and other car salesmen – offer something called hire purchase (HP).
Around a fifth of new cars, and many more used cars, are bought using HP – though it's not as popular as it once was. HP is similar to a standard loan when you're paying it, but there are two key differences. As the name of this form of car finance suggests...
You essentially HIRE the car over the period of the contract, with the option to PURCHASE it at the end.
So, the first difference between HP and a standard loan is that while you're paying off the finance, the finance company STILL owns the car. It's only once you've made ALL the payments (including the 'option to purchase' fee at the end, which is usually £100-£200) that ownership transfers to you.
The second key difference is that the debt is secured against the car. So if you can’t pay it, the finance company could repossess the car to help pay off your debt.
This sounds bad – and it can be – but what it also means is the risk of granting the finance is lower for the lender than it would be with an unsecured personal loan. This usually means that some turned down for a normal loan would be able to get an HP deal.
But, whether you get an HP deal or a personal loan (or you're still considering both), compare the APR – the annual percentage rate – to give you the overall cost of buying a car this way. Provided all the deals you're comparing are over the same number of months or years, the one with the lower APR is the best deal.
How does hire purchase work?
Once you’ve found a car you want to buy, you’ll know the amount you want to borrow.
Dealers usually ask for a deposit of 10% or more of the car's price – and if you're buying a new car, many franchised dealers (those affiliated with manufacturers like Ford, BMW etc) run promotions giving you a contribution towards this if you take one of their finance deals.
You then pay fixed monthly payments over a period of one to five years, and typical APR interest rates for HP tend to be between 4% and 8%. Some dealers will offer 0% finance – but this is more likely if you’ve a chunky deposit to put down. Remember, if you fail to keep up payments the finance company is entitled to seize the car.
What happens at the end of the finance deal?
Once all repayments have been made, you pay a final fee – referred to as the 'option to purchase' fee – to own the car outright. This covers the cost of transferring ownership to you, and is typically around £100-£200. It should be mentioned in the HP agreement you sign at the start – but if you can't find it, make sure you ask the dealer how much the fee is.
Let’s take an example of how much you'd pay in total…
Say you're buying a car priced at £14,000:
- You pay a 10% deposit of £1,400, leaving £12,600 left to pay.
- You borrow £12,600 over three years.
- You get a 5% APR deal, meaning payments would be £378 a month (£13,608 for the three years).
- After three years you can take ownership of the vehicle, paying a transfer fee of £200.
- So in total you’d pay £15,208.
Remember! The car is owned by the finance company until the final payment and 'option to purchase' fee have been paid. Until then, you have no legal right to sell the car (though the finance company may let you if you ask, and use the proceeds to fully settle the finance agreement).
Paid off half the debt? You can return the car & walk away
Known as a voluntary termination, there's a little-known clause in the Consumer Credit Act which allows you to get out of an HP agreement early. Provided you’ve repaid at least half the total amount owed, you can terminate the agreement and return the car to the finance company.
This is a handy clause in an HP contract if you find:
- You no longer need the car.
- You want to cut costs.
- You can’t afford repayments.
- You can get a similar car for a lower cost than you would by making the remaining payments.
If you decide to do this, the car should be in good condition when you hand it back. If not, you’ll have to pay for any outstanding repair work that needs doing.
If you're not yet halfway through the payments, you’ll need to pay the amount outstanding to reach halfway before you can get out of the agreement.
Important! If you decide to end the agreement early, make sure to get everything in writing and keep a copy so nobody can claim you have defaulted on your payments.
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Is HP the right option for me?
There are so many different options when it comes to buying a car, it can be difficult to choose. We've highlighted the main benefits and pitfalls of choosing HP here:
You can spread the cost, meaning you can get a better car than if you had to pay upfront.
It's simple to arrange and understand.
It's flexible – with terms from 1-5yrs (the longer the term, the more interest you’ll pay).
You would own the car once you’ve made all payments.
You may get a deposit contribution from the manufacturer.
HP can be easier to get than a standard, unsecured loan for people with poor credit histories (as the car is used as collateral).
It's possible you might be able to get 0% finance, though this is often reserved for those with large deposits.
You don’t own the car until you make the final payment.
You cannot sell or modify the car over the contract term without the finance company’s permission.
If you fail to keep up payments, the finance company may take the car away (it can do this without a court order until you’ve paid a third of the total amount).
Where can I get an HP deal?
There are two main options here. The most common is to get the finance through the dealership you're buying from. However, it's worth comparing any quote you get from a dealership with what an online broker can offer – and go for the cheapest.
Some car buyers are being unfairly overcharged interest by £1,000+ on finance deals from motor dealers and credit brokers because of lender incentives, the Financial Conduct Authority has warned. Always compare finance deals, look at overall costs and ask about how much commission the dealer or broker is going to get.
HP deals can be found from a handful of online brokers. These are handy to get an idea of the prices and repayments you might be looking at on your ideal car. Brokers offer a wide range of deals, including those for buyers with a tarnished credit history. They simply supply the finance through a variety of lenders.
If you're asking for a quote from any of these brokers, check whether they'll do a hard or soft credit search when they give you a quote. If it's a hard search, be wary, as this is fully visible on your credit file to other lenders as an application, even if you then don't take out the loan.
Too many of these in a short space of time is a red flag and could wreck your chances of getting credit in the future, so think carefully.
Some of these brokers will also be able to source vehicles for you, as well as finance. But you can still get your car from any dealer in the UK, and just use the broker for the loan. Funds will be sent to the dealer after the finance agreement's signed. Here are a few of the larger brokers operating in the UK:
Carfinance247. One of the UK's biggest car finance brokers, Carfinance247* offers deals to suit almost any budget. You source a car from any UK dealer. Once you've done this, and know how much you need to borrow, you can get a quote from Carfinance247 to see whether it can find an HP deal for you, and at what rate.
It has different deals depending on your credit score, with rates starting from 5.8% APR and going up to 30% APR for people with a bad credit history.
Zuto. Broker site Zuto* allows anyone to apply for car finance with it, but specialises in helping people who may find it difficult to get finance, for example, the self-employed, or people with a poorer credit history.
The rate you'll get depends on how good your credit history is. If it's excellent, rates are available from 9.7% APR. But poor credit scorers could end up being charged 34.3% APR or more.
Carzu. If you want a broker to look after the process of finding a car, as well as getting the HP deal (although you can opt to just get finance through it), try Carzu. APRs depend on how much you want to borrow.
Halifax Bank. Although not an online broker, Halifax also offers a Fixed Car Plan HP deal, which provides a similar service, yet it's only for its current account customers at the moment.
As with the other finance providers here, Halifax will send the cash straight to the dealer you're buying from. This means it will therefore own the car until the end of the deal. Halifax has a 3.4% representative APR on its car plans.
Often known as forecourt finance, or just car finance, it's offered by almost every dealer in the UK – and HP is one of the options available.
Dealerships come in three main types: franchised (tied to one or more manufacturers, eg, BMW garages), independent (not tied) and car supermarkets.
Getting an HP deal through a franchised dealership
In a franchised dealership, finance deals are usually arranged through the car finance arm of a manufacturer – for example, Ford Credit, or Volvo Financial Services. It's definitely worth looking at what these dealerships can offer you on a finance deal, especially if you're buying a new car.
If this is the case, it's not uncommon for the manufacturer to give £500-£2,000 to you as a deposit contribution, and also offer 0% finance. If you don't qualify for 0% finance, you'll usually get an advertised APR offer of around 5%; though this is representative, so if you have a poorer credit history, you may be offered a much higher rate.
Getting an HP deal through an independent dealership or car supermarket
Many independent dealerships and car supermarkets get their finance from big banks' consumer arms. Blackhorse (part of Lloyds) and Santander Consumer Finance, for example, supply finance deals to non-franchised dealerships.
These finance providers aren't tied to manufacturers, and therefore can't offer the heavily subsidised 0% finance or deposit contributions that the car companies' finance arms can. If you go to one of these dealerships, expect a representative APR of somewhere between 5% and 10% – or more if you've a bad credit record.
It’s a competitive market out there – check what’s available online and from dealers, and ask yourself what you can really afford. It’s vital you can afford the repayments before you commit. With all these types of finance, if your application is accepted, finance is sent directly to the dealer.
How do I get the best deal?
The rate you’re offered will depend on your credit score, with the best rates available only to those with a squeaky clean history. Also, having a big deposit will help.
Ideally, and try to do this before you apply for HP finance, take the time to check your credit history at one of the main agencies. If it’s in need of improvement, consider ways to boost your score. See our Credit Scores guide for more.
Once you've checked your credit score, then find the cheapest deal you can. If you've got your heart set on HP finance, then find the cheapest HP deal. If you'd be happy with a personal car loan then this is almost certainly going to work out cheaper, though they are harder to get than car finance, as they're unsecured.
With car finance, much depends on where you're buying the car, how much you need to borrow and how good your credit record is. As such, there's no one-size-fits-all answer, other than to say: compare all the finance options, and pick the cheapest.
Hire purchase Q&A
When you apply, the lender will do a credit check to decide whether to lend to you, and this check will appear on your file as an application for credit.
Credit checks for HP aren't usually as stringent as those for personal loans. This is because the HP finance is secured on the car – if you don't pay, they can just come and repossess the car, whereas for loans there's no security, so they'd need to chase you through the courts.
Pay the finance off on time each month, and it'll help your credit record. Fail to pay on time, and you'll be marked as 'in default', which could affect your ability to get a mortgage or other credit. See our Credit Scores guide for more info.
They can be, and particularly if you can get a 0% deal (often reserved for those with high deposits of 40% or more).
If you can't get a 0% deal, check that the interest rate on what you're being offered is an annual percentage rate (APR) and compare it against the rate you’d be able to get on a standard loan.
If you miss a payment, it's likely the lender will contact you to see if you just 'forgot'. If you keep missing payments, it'll mark you 'in default'. Once this happens, it'll quite quickly take the car, as to leave it with you while it chases payments risks the car depreciating in value.
As well as taking the car, if you fail to keep up repayments, you'd get a default mark on your credit file, which could affect your ability to get a mortgage or other credit. See our Credit Scores guide for more info.
Dealerships sometimes quote this to make a finance deal look more appealing.
A flat rate means you’re charged interest on the original amount you borrow, no matter how much you’ve paid off, which isn't how interest really works. So a flat rate of 6% might sound cheap, but it’s actually the equivalent to 12% APR.
The APR will be on any finance agreement you sign, so make sure you look for it. If you're being quoted an interest rate, make sure you ask if it's the APR – if not, ask what that is.
You can pay a bigger deposit, meaning you borrow less. Or you can spread repayments over a longer period. However, doing this means you will pay more interest, so consider whether it's worth it.
You can do this at any time. Unlike a standard personal loan, an HP doesn't have any fees if you want to pay off the entire loan early.
Contact your lender and ask what the best way to do this is.
If you buy a car using HP and realise it's faulty, it's worth returning it and asking the dealer to fix it. If the dealer refuses or tries to charge you, go to your HP provider.
Your HP finance provider legally owns the car until the loan is repaid, so your contract is with it – not the dealer that set up the agreement. This means your HP provider is legally responsible for any problems with the car.
Buying on HP means you’ll specifically need to quote something called the Supply of Goods (Implied Terms) Act. This states that goods must meet their description and be of a satisfactory quality and fit for purpose. You can quote this legislation when making a claim for the faulty car against your HP provider.
So, by all means try to resolve the problem with the supplier, but if this doesn't work, try the HP provider, which is the company you're making repayments to. It's bound under the same act, and if you're still not happy, take your complaint to the free Financial Ombudsman Service.
There are three main types of gap insurance policies, but they all have the same general aim. If you have a crash, or your car's stolen, your insurer will usually only pay out the amount the car is worth at that time.
Gap insurance is a policy you can buy which pays out an amount above this, either to get you back to the original sale price of the car, to the amount you have outstanding on finance (which can, at times, be greater than the car's worth), or to the amount it would cost to buy the car new at the time of the claim.
It’s offered because cars depreciate really quickly. The AA calculates that on average new cars lose 60% of their value within three years.
However, watch out for dealers offering you gap insurance. Since September 2015 they haven't been allowed to sell gap insurance to you at the same time as your finance deal (they need to wait a week).
But it's best to steer clear of getting gap insurance from your dealer anyway. The policies they sell tend to be quite expensive, and are easily beaten by standalone providers – if you think getting gap insurance is worth it. It's not a necessity, and many think it's not worth the paper it's written on.
See buying a new car for more on gap insurance and where to find a policy.